Cutting taxes and incentives for working

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Give the Government credit. It could have satisfied the
appetites of its greediest supporters by cutting the top rates of
tax consistent with a move to a flat rate of income tax.

Instead it preserved the progressivity of the income tax scale
by increasing the rates at which the top rates cut in - by $5000 to
$63,000 for the 42 per cent threshold, and $25,000 to $95,000 for
the 47 per cent threshold.

Even so, it is still the recipients of welfare who face the
highest effective marginal tax rates in the transfer from benefits
to work, despite the lengthening in the "taper" that reduces the
rate from 70 to 60 per cent.

And every respectable study of tax incentives shows that the
EMTR is a far more potent disincentive on the willingness of the
poor to work than high marginal tax rates for high earners.

For high earners, the income effects of lower marginal tax rates
(I will have more income as a result of the tax cuts, therefore I
can afford to play more golf and work less) is likely to be as
important as the incentive effects ( I will work more overtime
because I will take home more of the extra income).

The income effect on those in the transition from welfare to
work is likely to be zero, and they have the additional problem
that the transition creates additional costs for transport, clothes
and food, as well as child care.

If the Government is to make a serous dent in the numbers on
welfare it will still have to rely on the stick of "breaching"
recipients rather than the carrot of lower EMTRs.

And where are the jobs coming from? The Treasury is forecasting
a fall in employment growth from 2.8 per cent in 2004-05 to 1.8 per
cent in the budget period. Are employers going to participate in a
game of "churning" jobs between the fit and the unfit, or is this
simply a populist exercise in making the lives of the lame, the
halt and the blind more miserable than they are now?

Combined with the tax changes it may provide a distraction from
the fact that there has been no real change in the tax burden.

The Commonwealth Statistician and the Commonwealth Grants
Commission have always said the GST is a Commonwealth tax. Now the
Treasurer also agrees it is a Commonwealth tax.

The state and territories disagreed with his plans to abolish
more state taxes and he threatened to penalise recalcitrant states
through variations in the GST funding.

To know where we are, we have to see where we came from. In
1996, when the Government changed, total taxes as a proportion of
GDP came to 23.1 per cent of GDP, including the revenue from the
wholesale sales tax that was replaced by the GST in 2000.

Adding back the GST, taxation as a proportion of GDP has risen
by 2.3 percentage points to 25.4 per cent in 2005-06 - equal to
some $21 billion billion, or an average of some $2300 a year for
each household.

So what have taxpayers got for this extra burden? Better public
education or Medicare and public hospitals or more security? No.
The Government has failed to maintain the public education and
health system by switching funding to the private alternatives.

For instance, in this budget, funding for non-government
schools, which educate a fifth of the school population, is
increased by $417 million, while the funding for Government
schools, which educate four-fifths of the school-age population,
gets an additional $256 million. Private schools now get twice the
money available to government schools for higher education.

Defence spending grows by $1.5 billion in this budget, but
arguably security has been degraded by Australia's decision to join
the coalition of the willing and the decision to abandon
Australia's "self-reliance" strategic posture in favour of chasing
America's enemies around the world in the name of the war on
terrorism.

But the prime reason Australia's tax burden has increased has
been the fire sale of assets at bargain prices since 1996 in order
to reduce Government debt, and create surpluses in the forlorn hope
that this would boost household savings and turn the
balance-of-payments current account deficit towards surplus.

In fact, for the past three years, households have been eating
into their disposable income - firstly to buy the more expensive
privatised services created by the Government, and secondly to
exploit the tax advantages of a capital gains tax.

The Government created a "lazy" balance sheet in the interests
of speculators and financial capital instead of using revenues to
finance physical infrastructure - especially rail, ports, R&D,
broadband and training and education - which can tackle our
underlying foreign debt problem and where "externalities" such as
safety, environment, and lower nationwide economic and social costs
cannot be captured by individual investors, and therefore must be
publicly financed, if they are to be done at all.

And now we have the maddest idea of all. The Government will
sell its majority share in Telstra, which provides the only chance
that it will invest in developing a first-class national network -
in order to put the money into the hands of the financiers who will
earn gigantic commissions speculating on shares on behalf of the
Orwellian-named Future Fund.

If the Government can't invest the money in nation building,
which is the only way for government to ensure the future income to
finance an ageing population, it should give the money back to
taxpayers.